Initiatives

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ILSR's Waste to Wealth program helps communities across the country create policies and practices that address citizens' environmental concerns and economic needs. We help citizens fight the incinerators and landfills that pollute their air and water, and drive property...

Since 2007, FERC has had 45 requests for bonus incentives for transmission development – authorized under the 2005 Energy Policy Act – and has provided all or most of the requested incentives in more than 80 percent of the cases. With the bonuses, the average return on equity for utilities for their new transmission investments is nearly 13 percent. This high rate of return is a full 2.5 percentage points higher than the median utility return on equity, a value considered just and reasonable by state public service commissions in ordinary times. However, these rewards came during a time when unemployment doubled, the stock market tumbled, and most corporations were lucky to have any profit.

The ratepayer impact of these bonuses is significant. In a November 2010 criticism of FERC transmission awards, Commissioner John Norris noted that the 2 percent bonus FERC provided to the PATH high-voltage project on the Eastern seaboard would “cost [Maryland] ratepayers in PJM at least $18 million per year.” The bonus payments were also given in concert with other incentives that reduced risk, including rate recovery during construction and guarantee of payment if the facilities were abandoned for reasons outside utility control.

While FERC asserts that it uses the bonuses to help incentivize the development of new transmission to improve reliability and reduce congestion, it doesn’t do its homework. Rather, FERC (1) refuses to study more economical alternatives, (2) doesn’t require the incentives to be necessary for the transmission development, (3) doesn’t even require that the proposed utility expenditures are prudent:

FERC: “There is no requirement in section 219 or Order No. 679 that an applicant must demonstrate that its project is the best of all possible projects, or that it has explored every conceivable alternative before deciding to proceed with a particular project.”

FERC: Moreover, the Commission generally does not require that utilities seeking to recover costs through their rates demonstrate initially that all expenditures for which they seek recovery were prudent.76 Rather, participants in rate proceedings seeking to challenge the expenditures must first create a serious doubt as to the prudence of the expenditures before the burden shifts to the filing utility.77 As stated in Order No. 679, “[t]he Commission is making no change in the long-standing regulatory presumption in a section 205 proceeding that costs are prudently incurred, but parties are free to provide evidence to the contrary . . . .” [emphasis added]

The most likely outcome of FERC’s lavish program for transmission development is a significant increase in utility shareholder profits at the expense of ratepayers, with only marginal improvements in the amount of available transmission capacity for new centralized renewable energy projects. The program may actually decrease utility interest in expanding transmission capacity, because offering them a higher ROE increases the total cost of new infrastructure, decreasing the demand for it and reducing investment.

Even as it overpays for new transmission, FERC is throwing money at an outdated model of the electricity grid. Renewable energy is available everywhere, and states and communities have seen the opportunities of tapping it locally. Sixteen states have recognized the benefits of distributed generation by adopting solar or distributed generation-specific mandates. Communities encourage distributed generation for the increased economic benefits from locally-owned and developed projects. While some new transmission infrastructure is inevitable as the grid transitions to majority renewable power, most communities are interested in tapping their local resources first.

Transmission utilities are enjoying their ride on the high voltage gravy train, but ratepayers and citizens would be better served if FERC’s program derailed.

About John Farrell

John Farrell directs the Energy Self-Reliant States and Communities program at the Institute for Local Self-Reliance and he focuses on energy policy developments that best expand the benefits of local ownership and dispersed generation of renewable energy. More